MBA HEC Paris

Financial Markets Philippe Henrotte

Practice 4

Forwards & Futures

Answer the five questions as a value rounded to the nearest US Dollar.

Problem 1. Variation Margin (3 points)

You sell 15 futures contracts for a period of 10 business days on the orange juice contract
traded on ICE Futures U.S. expiring in March 2017 (the OJH7 contract). The following
table indicates the daily settlement price of the futures contract in cents per pound at which
your position is marked to market. The initial margin and maintenance margin per contract
are respectively USD 2, 000 and USD 1, 500. We recall that the size of one contract is 15, 000
pounds of frozen orange juice. At midday of the first day you sell the 15 futures contract
at a price of 180.20 cents per pound. On Day 10 you close your position by purchasing 15
contracts at a price of 172.50 cents per pound. We assume that you have sufficient financial
resources to answer any margin call in a timely fashion and that you make no withdrawal
from your margin account before you close your position on Day 10, at which point you
empty your account.

Day Settlement Price

1 182.50
2 183.60
3 181.20
4 179.50
5 184.30
6 186.70
7 188.00
8 182.40
9 175.20

Question 1. (1 point) What is the total amount of margin calls which you have to pay?

Question 2. (1 point) How much do you withdraw from your margin account on Day 10?

Question 3. (1 point) What is your overall profit or loss on this investment? Report a
profit as a positive number and a loss as a negative value.

1
 Problem 2. Hedging (2 points)

As a producer of orange juice, you seek to hedge the sale of your production by using
the orange juice futures contract traded on ICE Futures U.S. expiring in May 2017 (the
OJK7 contract). The production which you wish to sell amounts to 675, 000 pounds of
frozen orange juice concentrate. The size of one contract is 15, 000 pounds of orange juice
concentrate and the futures is quoted in cents per pound. You initiate your futures trade
when the futures price is 178.00. In May 2017, you deliver your production using the futures
contract with a settlement price for the futures at maturity equal to 165.40. The quality
of your production means that the exchange applies a discount of 0.5% on the settlement
price as you deliver your oranges.

Question 4. (1 point) What is the profit or loss which you generate on your margin account
during this trade? Report a profit as a positive number and a loss as a negative value.

Question 5. (1 point) What total value have you been able to secure for the sale of your
production, taking into account your hedge with the futures contracts?